Initial public offering

Australian Politicians Take Note: This is how you do Crowdfunding. USA Passes Regulation A+

david-drake-ceo-ldj-capitalDavid Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City private equity firm, and The Soho Loft, a global event-driven financial media company helping firms advertise for investors. He writes regularly for Forbes, Thomson Reuters, Huffington Post & Startup88 on Crowdfunding Companies and Real Estate. You can reach him directly at David@LDJCapital.com or make connect on linkedin.com/in/ldjcapital

 

There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.  Brutus, Shakespeare 

Ed: David has been a Startup88 contributor and campaigner for two years but he is also one of the most prolific writers and speakers on the Crowdfunding Conference Circuit, his travel schedule is Herculean and he is arguably one of the USA’s lead experts on Crowdfunding.

I wanted to write a foreword to this article to make a plea to our Government to follow the USA when passing our impending legislation.

It was a massive surprise to see the US virtually remove all restrictions on Crowdfunding. I think it’s the sign of a mature Government that understands Free Enterprise needs flexible mobile capital and that citizens should be able to make their own choices what they do with their money.

Australian Politicians should open their eyes to what is happening with Crowdfunding, Public Markets and the small investors.

Increasingly Small Investors are turning away from public markets, lack of transparency, insider trading and algorithmic trading mean that the small investor is going to get screwed and I think they know it.

Investors want to help Startups launch and grow and it isn’t just about the investment. Everyone likes the idea of helping a startup launch and grow. 

Investors want to be able to say they were a part of a growth story

Once upon a time Australia rode on the back of the Sheep. In the last 20 years, we have been the worlds mine. Whats our next play? It’s not clear.

Inherently every investor knows that the country needs to get better at technology and science commercialisation and knows the market needs help.

They know there are risks but they also know that we must increase our startup successes, the country must take action. 

In a country where successive Governments have made Gambling available on every street corner and broadcast to every young kid who watches the Football, we are as a nation addicted to Gambling.

Its a absolute joke you can walk into a pub or Casino and bet $50,000 on black or on a horse, any day of the week without interference.

Sadly the same Governments wont let you invest $10,000 to help launch a startup that might one day grow up to be a Google, SpaceX, Tesla, Atlassian, Campaign Monitor, Resmed or Cochlear (and yes there isnt many billion $ Australian companies you can compare, we just haven’t had the same level of success in the tech/science space).

The Australian Venture Capital Space has been underserved for many years, whilst in recent time there has been an increase in seed and angel capital, Series A and B is very limited.

And yet, Australian investors have been playing the startup scene for 100 years, you see Australians love investing in Mining Explorers.

Mining Explorers are essentially the startups that drove our last boom. Without the Explorers Australia would not have had the mining boom.

Mining Explorers have a similar risk profile to Startups, very high failure rate with a massive outcome if successful, a very similar binary outcome.

There is an active market in funding Mining Explorers, the same investors should be able to fund startups. No Liability Mining Companies appear to be able to list with little in the way of disclosure, certainly no revenue and extremely high risk.

Perhaps a similar structure for Startups is appropriate.

Australian Startups need an alternative source of capital and aside from an increase in US VC money and Asian money to cherrypick the top companies, Crowdfunding is the only means which is available.

I appeal to The Hon Malcolm Turnbull who is a supporter of the Startup community to do everything in his power to ensure that our Crowdfunding Legislation does not arrive so bound in red tape and rules that is it stillborn.

I know its not Malcolm’s patch, but he one of the few who understands, essentially a large part of his wealth derives from an Angel Investment which made good.

Remove the limits, open the gates, let the market decide with the appropriate warnings and safeguards.

As an aside Angelist.co is going to make a killing out of this and now for David’s article.

Regulation A+ Passes

On Wednesday, 25th March, 2015, the Securities and Exchange Commission (SEC) approved the final rules to activate implementation of Regulation A+ which is Title IV of the Jumpstart our Business Startups Act, or JOBS Act. The approval of Regulation A+ is a major breakthrough in the crowdfunding industry as it allows startups and small businesses to raise a maximum of 50 million dollars through crowdfunding under this law.

Regulation A+ Background

After Congress enacted the JOBS Act in 2012, the process to correct Regulation A was initiated. Regulation A was a provision in the federal law that paved way for companies to fundraise a maximum of 5 million dollars through public offers but it was rarely used.

Regulation A’s major shortcoming was the fact that it required companies to register their offerings in every state where they intended to offer securities. Compared to other commonly applied laws like Regulation D, this requirement made it extremely costly for companies to offer securities. Regulation D requirements allowed companies to raise similar amounts or even more without incurring high costs of complying with state laws.

Regulation A+ is a Game Changer

The newly approved Regulation A+ fixes the provisions of Regulation A. First, by raising the maximum ceiling from 5 million to 50 million dollars and secondly, eliminating the state compliance requirement. Most importantly, the new rules set by SEC for Regulation A+ now expand the pool from which these funds can be raised, from just accredited investors, as provided by Regulation D, to the general public.

This means that startups and small businesses can now hold small Initial Public Offers not just from accredited investors, but also from the general public. This will surely be a game changer in the way businesses access capital going forward.

Scott Andersen, ConsultDA Partner (a) and General Counsel at FundAmerica says, “Participants in Reg A+ will frequently operate on an investment advisory model. Compared to the broker-dealer model, investment advisors are not regulated by FINRA and so it is generally less costly to operate. This is important because it offers an option that enables entrepreneurs to pursue business opportunities that Congress intended when it enacted the JOBS Act.”

Why Regulation A+ is Important for the Crowdfunding Industry

Approval of Regulation A+ is important for the crowdfunding industry because it does not only open new opportunities but it also addresses key industry concerns.

There were concerns in the industry that SEC would give into pressure from state securities regulators regarding the proposed rules. State securities regulators had been opposed to the proposal of lessening crowdfunding restrictions. But SEC remained firm on the proposed rules for Regulation A+, letting companies raise capital without meeting state-to-state compliance and spending exorbitant amounts in registering offerings.

The other critical crowdfunding concern that the SEC rules for Regulation A+ addressed has to do on who should invest in the public offerings. Initially, the JOBS Act set the limit for Regulation A+ offerings to only “qualified investors”. This brought in a debate that only “accredited investors”, which means individuals earning 200,000+ dollars per year, or those with a net worth of 1 million or more dollars, were allowed to invest. The new rules set and approved by SEC on Wednesday for Regulation A+ expand the definition of the “qualified investors” term to mean that anyone can invest, with amount limits.

According to Scott Purcell of FundAmerica, “Compared to 506(c), Reg A+ takes way more time to launch an offering, and far more costly in terms of legal fees, accounting costs, and annual reporting obligations. However, it enables you to sell to unaccredited investors and creates a tradable security.”

Investor Protection

Investor protection is an important element that the newly SEC rules for Regulation A+ address comprehensively. The newly approved rules allow investors to only invest 10 percent of their additional net worth or annual income in securities. SEC also moved to implement strong measures to protect investors like ‘bad actor’ checks on companies that offer securities, as well as requiring companies offering securities to disclosure financial information as part of their offering.

The entire version of Regulation A+ rules is available here. Prior to becoming law, these rules will be published on the Federal Register over the next 60 days. After this process is complete, the law will come to force and entrepreneurs will be able to use crowdfunding to raise up to 50 million dollars in capital through offerings.

Note:

(a) IN FULL DISCLOSURE, SCOTT ANDERSEN AND I RECENTLY FORMED AND ARE PARTNERS IN A SECURITIES COMPLIANCE CONSULTANCY FOR BROKER-DEALERS, INVESTMENT ADVISERS AND OTHER FINANCIAL INSTITUTIONS: CONSULTDA.COM.

@OzForex, Australia’s biggest Tech IPO for 2013 – text book example of finding & solving a big problem

Matthew- Gilmore-Founder OZforex - Credit Linkedin.com

Matthew- Gilmore-Founder OZforex – Credit Linkedin.com

Late last week OzForex raised $439.4 million by the issue of 12 million new shares and the sale and transfer of 207.7 million existing shares. The float was heavily subscribed by institutional investors.

OzForex is an online foreign exchange and global payments provider and a strategic investment of Macquarie BankAccel Partners and the Carlyle Group. OzForex is part of the OzForex Group which also includes UKForexCanadianForex, NZForex, USForex, ClearFX and Transfers.

Interestingly OzForex was started by Matthew Gilmour  ‘‘as an experiment’’ after accepting a redundancy package in 1998 while working as the head of foreign exchange at Bankers Trust 

As with most great entrepreneurs, he found a really good problem and then found a way to solve it. The problem was that in the 90s if you were a large corporate you had a dealing room and account manager to take your Forex orders.

If you were a small to medium company (which can still be pretty big in turnover) you had to stand in line at a bank and wait for someone to fill out a Telegraphic Transfer and take whatever rubbish rate they gave you on the day. So every importer and exporter in the country had this problem. 

Matt worked out that if he could give an internet dealing platform to small to medium business he could make the margin on the transaction instead of the bank and solve a major pain point for the customer.

In my opinion finding a good meaty problem is the biggest challenge of launching your own startup, as I often rant too many startups are solving non problems. Find a critical burning problem and solve it. As Bill Bartee @wbartee from Blackbird Ventures and Southern Cross Venture Partners says, you want a find a problem that is like somewhat like Appendicitis, if the customer doesn’t solve it, its going to get really bad really quickly.

OzForex held off on raising venture money for a long time. In fact, only just last year it raised $70 million in equity funding from The Carlyle Group and Accel Partners (an investor in PandoDaily), which can count this as another win following eBay’s $800 million acquisition of Braintree, another of its portfolio companies, last month. The Macquarie Group was another major investor in OzForex.

OzForex is Australia’s third-biggest IPO in three years, and the largest tech IPO in the same period,according to Bloomberg. For the year ended March 31, it posted net earnings of US$16.2 million and net operating income of $49.3 million. For the fiscal year of 2013, it made $8.6 billion worth of transactions, projecting a net profit of $17.6 million dollar for the year through March 2014.

The day’s trading puts the company’s market cap somewhere in the region of $600 million. Founder Matthew Gilmour will pocket about $60 million from the sale, as will early investor Gary Lord.

OzForex

OzForex (Photo credit: Wikipedia)

The successful outing is expected to stoke confidence among Australian companies eyeing up an IPO. It may not fix the country’s venture capital woes, but it’ll at least give the country’s nascent startup community another success story to point to and with the announcement of Freelancer.com pending float makes the year look a bit more promising and will keep the advisory firms in Zenga and Ferrari’s for another year. Interestingly the Advisers to the IPO picked up about $10m in fees. Nice work. 

For the last financial year, OzForex posted a net profit of $13.1 million.

The company’s prospectus forecast a stronger year in financial 2014, with profits expected to rise to $18.6 million, excluding costs of listing.

Thought it might be useful for other startups to outline the company’s history

Company history:

1998 – Launch of ozforex.com.au as foreign exchange information site in SydneyAustralia by Matthew Gilmour.

2000 – ABN status active, ABN 65 092 375 703

2001 – Launch of online dealing facility

2003 – NZForex and Tranzfers.com launch

2003 – Australian Financial Services Licence, AFSL, issued by the Australian Securities and Investments Commission, license no. 226484 

2005 – Former Bankers Trust Managing Director and Head of Asian Foreign Exchange Gary Lord joins the OzForex Group as Managing Director.

2005 – OzForex expands its operations into the UK and launches UKForex.co.uk with offices in London.

2005 – Global 24-hour trading platform launches, annual turn-over exceeds US$1 billion

2007 – Macquarie purchases 51% of OzForex, new CEO Neil Helm joins from Macquarie

2007 – CanadianForex launches in Toronto, Canada.

2008 – Member of Financial Ombudsman Service, member no. 11340

2008 – International Money Transfers, a service from Macquarie and OzForex, launches

2008 – Turnover exceeds US$4 billion

2009 – ING Direct uses OzForex platform to offer international money transfer[disambiguation needed] service to customers 

2010 – ClearFX.com launch 

2010 – The group receives minority growth investment from Accel Partners and The Carlyle Group. Representatives from both Accel Partners and Carlyle serve on the OzForex Board of Directors. The company’s founders and Macquarie Private Wealth, which is part of Macquarie Group, are together retaining significant ownership of OzForex, Neil Helm continues as CEO.

The company’s client base includes small and medium-sized businesses that import and export goods, as well as migrants transferring financial assets, expatriates repatriating funds, and individuals investing overseas.

The OzForex website provides real-time exchange rates for dozens of currencies, as well as historical charts and strategies to manage exchange rate exposure.

 

 

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